India has started its race to become Global Electronics Manufacturing Hub by 2025 under its National Policy of Electronics 2019. The nation aims to integrate into global value chains for electronics and component manufacturing spearheaded by localised mobile handset production. The erstwhile Make in India program, now branded Atmanirbhar Bharat, aims to incentivise domestic production through a combination of better Ease of Doing Business, rationalising corporate taxes, using trade protectionism and hard industrial policies like China.
China steadily grew from undertaking low value-added manufacturing to achieving Make In China 2025 for developing indigenous semiconductor fabs. But there are many more fundamental differences between China and Indian policy makers than they seem to be.
The primary difference is foresight!
India has been at the forefront of introducing protectionist policies, has the highest tariffs in the world, and is known to have one of the most restrictive trade practices. While protectionism is a global trend to allow developing economies to promote infant industry and prevent domestic market failure; the Indian government has unfortunately not been able to create any national champions for global market; let alone preserve its indigenous players for the domestic market (with a few sectors such as automobiles as exceptions).
One might ask, why? Because we Indians love to count our chickens before they hatch.
Indian policymakers hesitate to recall, but the success of the Indian mobile handset production rode on tariff barriers imposed on “IT Products” after pulling out the device from ITA-1 in 2015. A huge domestic market potential and a labour arbitrage motivated global players to shift their assembling operations to India; albeit only for the Indian market. A classic example of Dual Circulation: Make in India, for India.
Committed government leaders saw an opportunity to tap the successful South East Asian Model of FDI-led export growth amidst a growing US-China trade war. Carefully crafted Production Linked Incentives (PLI) and Scheme for the Promotion of Manufacturing of Components and Semiconductors (SPECS) helped cover manufacturing disabilities in India relative to China and Vietnam. This magnetised reshoring Apple ecosystem to put its few eggs in the Indian basket. The Cupertino giant committed a US$1.5 billion investment with Pegatron, Wistron and Foxconn in India. Samsung, with the largest mobile factory for the world reshaped its product portfolio to export. Xiaomi has a local value addition of 20% within four years of starting Indian operations.
Just as global investors were gaining confidence in Indian policymaking, Budget 2021 tweaks yet again threaten to impact domestic manufacturing. We had not yet recovered from December 2020’s Wistron incident highlighting lax public administration; the 2021 Budget introduced a 15% import tariff on eelectronic parts, inputs and sub-components which had been covered under zero duty until 2021. As a result, hardware manufacturers will now find it profitable to import complete subassemblies from China, rather than producing in India. A higher electronics manufacturing disability in India and diseconomies of scale make it economically unviable for the players to manufacture in India and export for the world.
One wonders what does Indian Govt envision: Make or Not Make in India? The mobile phone industry agreed to 18% GST from a rationalised 12% GST in FY 2021 amidst a global recession, filling government coffers with additional INR 6,000 crores (£600m) in 2020. Of this, INR 30,000 crore (£3 billion) GST accrued by the mobile handset industry in the period April – December 2020). Additional duties on components/sub-components increase the price of device burden on the Indian customer, without any benefit to national welfare.
The new Biden Administration will assist MNCs decouple their supply chain from China. India may opt for Non-Tariff Trade Barriers like suspending quality certifications for products of Chinese/Vietnam origin or introduce customs delays. MNCs will ramp down their significant production in India over the coming few months leading to job losses and an overall slump in government revenue.
But it is not late. The goose has not yet been killed. If the policymakers rationalise the duty structure in parts, ensure a lock-in period to avoid frequent changes, facilitate policy stability and, most importantly, take cognisance of global investor sentiment. Because for a country seeking to attract significant inward investment and create jobs, your reputation precedes you.
